Fairfax stock positions

[petec]

There's been a lot of commentary about how Fairfax buy junk rather than owning great businesses for the long term. I decided to do a quick review to see whether the current holdings fit that assumption and also to see how they stack up. I did this for myself but I'm sharing it in case it is useful. It's not deeply researched and I have probably missed some important ones, but in rough order of size here the ones I have looked at are:

 

Eurobank/Grivalia. I'll deal with these together since they will soon merge. Eurobank is one of the last 4 banks standing in Greece. This could become a very profitable oligopoly when Greece exits its depression, which it seems to be doing: GDP is growing, the fiscal and current accounts are in good shape, labour has regained competitiveness, unemployment is falling, and real estate prices are finally rising. Eurobank's nonperforming loans are fairly fully covered by provisions and collateral and the bank is profitable and generating capital every quarter. Grivalia is a leading Greek real estate company which has been picking up top assets at the bottom of the cycle. Postmerger (which also involves spinning a lot of the nonperformers out to shareholders as a bond) the bank will be well capitalised, profitable and trading on under 50% of book value. It won't pay taxes for years. There's a decent chance this is a major winner over the next few years.

 

Recipe. Canadian casual dining restaurant chain created by Fairfax, who hand-picked management and look to be long term owners. There's debate about the quality of some of the brands but the business of franchising restaurant brands is a sound one and the stock's not expensive. The last couple of years have been spent building and professionalising the management platform and it will be interesting to see what they can do with it over time. M&A is a goal.

 

ICICI Lombard. Fairfax cofounded this business with ICICI in the early 2000's and it has been a huge winner. They bought more as regulation allowed but then decided to sell down when ICICI decided on an IPO: ICICI still wanted control, and you have to list 20%, and Fairfax wanted a greater stake than would have been possible. They're now at 9.9%, the largest stake they can have and still control another insurer. That other insurer is Digit, a startup they expect to grow rapidly.

 

Fairfax India. Holding company created by Fairfax to buy and build businesses in India. Fairfax will hold it forever. Buys, on balance, high quality franchises with great growth prospects (Bangalore Airport).

 

Quess. Fairfax initially bought this fast-growing staffing company through Thomas Cook India and it has been a hugely successful investment. TCIL will spin it out in 2019 so it will become a direct investment. It continues to grow rapidly.

 

Seaspan. Container ship leasing company of which FFH could eventually own 40%, purchased via warrants at crazy attractive prices. The first stock on the list that clearly isn't a high quality business, in the sense that it's in a cyclical industry with no barriers to entry and a reputation for capital ill-discipline. But it is cheap, on a c.30% free cash flow yield and the supply side of the industry is the best it's been in decades. Also, there's a new management team who are proven hard-asset capital allocators. FD: I am long Seaspan and expect to do very well from Sokol's decisions over the next decade.

 

Blackberry. This can't be thought of as anything other than a mistake but for better or for worse Fairfax have stuck with it. They hand-picked the CEO who has done a good job of getting the company back to growth and FCF generation. Might be a winner in automated cars and the recent acquisition of Cylance may be a positive too (see most recent BB call for some breathless comments from an analyst). Hard to know but if I had to guess I'd say this was past the worst and the valuation is starting to look vaguely reasonable (at least on EV/EBITDA). FFH have huge leverage to the upside if this works soon: their stake basically doubles when the stock goes through $10 due to a $500m convert due 2020.

 

Thomas Cook India. India's leading travel agency. Fairfax has controlled it since 2012 and has used it to buy a number of related businesses from Kuoni. One gets the sense they're building a long term platform here in a growing and profitable industry.

 

Commercial International Bank of Egypt. High quality bank in an incredibly underbanked country. Consistently earns 30% nominal ROEs and Fairfax commentary suggests to me they will hold for a long time. Political risk is meaningful.

 

Resolute Forest Products. The worst on the list, for me. Fairfax have been involved for 11 years and haven't done well.

 

Kennedy Wilson is an active real estate manager which invests its own money alongside third party money wherever it finds value, and recycles capital regularly. Fairfax has owned shares since 2010. Growth for the next few years should come from completing developments and growing third party AUM (the company has $2bn in third party AUM and aims to add $1bn a year for the next several years). As of early 2019 the share price is $19 and JPM estimate the NAV is $26 going to $30 in 2020. The dividend is 4.4% and rising, and a buyback is in place. The founder/CEO owns 9% and Stanley Zax (Zenith) and Richie Boucher (BKIR) are on the board. As well as owning shares Fairfax have invested $700m alongside KW since 2010 and done well. (As an aside the annual letters say FFH initially bought 11.5m shares at an average price of $11.90, mainly through convertible prefs; this stake went to 12.2m at an average cost of $11.37; and then 12.3m at an average cost of $11.10. This implies a cost of $2.66 for the second purchase and a negative cost for the third, yet the shares never traded below $16. Either there's an error or FFH had a bizarrely juicy option, or they're doing something naughty like subtracting the dividend from the cost.)

 

Fairfax Africa Holdings. Holding company created by Fairfax to buy and build businesses in Africa. Fairfax will hold it forever. Has made a slow start but has some promising investments.

 

IIFL Holdings. Long term holding in a fast-growing financial services provider. FFH holds a direct stake as well as one through Fairfax India. Has been a huge winner.

 

Stelco. Recent (and comically poorly timed) investment in Canadian steel company recently out of bankruptcy. Not a good industry but stock is unencumbered and very cheap on near term cash flows. It also has real estate optionality and management who claim to be countercyclical capital allocators and who want to build a much bigger company when asset prices are cheap.

 

---

 

For me a few common themes seem apparent:

 

1) Fairfax are long term, patient value investors. Beyond that they are not easy to characterise. Sometimes that value is in cheap junk (Stelco). Sometimes it's in quality growth (Quess).

 

2) Many of these holdings are long term M&A platforms. Fairfax like partnering with (what they see as) good management to build businesses over decades. I suspect in some cases this will last for decades (Recipe, FIH, FAH, TCIL, maybe SSW). In many cases they build the platforms and pick the managers.

 

3) Fairfax take huge positions. On the downside this means they can't exit losers (RFP, BB, Eurobank). Even if they they eventually turn a profit, it's hard to see how they earn a good IRR. On the upside, when it works they end up with big stakes in huge winners (ICICI Lombard, Quess, IIFL).

 

4) Fairfax often get good terms for their shares (e.g. the SSW, KW, and BB converts, and the FIH/FAH fee structures) which skews the risk/reward in their favour.

 

5) On balance, I am inclined to think there is a lot of value in the portfolio currently.

 

[StubbleJumper]

Pete,

 

Thanks for taking the time to put together such a thoughtful post.  I would offer a couple of pieces (of shit) that you might add to your list:

 

 

1) Torstar

 

2) Churchill Railway

 

3) Toys R US (is this a POS or not, time will tell)

 

 

The three above don't cause me too much consternation as only the first was a meaningful portion of FFH's capital when it was acquired.  I don't think I need to talk about position sizing or exit strategies in this post.  ;D

 

 

SJ

[petec]

Pete,

 

Thanks for taking the time to put together such a thoughtful post.  I would offer a couple of pieces (of shit) that you might add to your list:

 

 

1) Torstar

 

2) Churchill Railway

 

3) Toys R US (is this a POS or not, time will tell)

 

 

The three above don't cause me too much consternation as only the first was a meaningful portion of FFH's capital when it was acquired.  I don't think I need to talk about position sizing or exit strategies in this post.  ;D

 

 

SJ

 

I was aiming for the big public positions. These are either small (now) or private. I always think it’s pretty tough to analyse the private ones given we seldom know the deal terms or postdeal performance.

[StubbleJumper]

Pete,

 

Thanks for taking the time to put together such a thoughtful post.  I would offer a couple of pieces (of shit) that you might add to your list:

 

 

1) Torstar

 

2) Churchill Railway

 

3) Toys R US (is this a POS or not, time will tell)

 

 

The three above don't cause me too much consternation as only the first was a meaningful portion of FFH's capital when it was acquired.  I don't think I need to talk about position sizing or exit strategies in this post.  ;D

 

 

SJ

 

I was aiming for the big public positions. These are either small (now) or private. I always think it’s pretty tough to analyse the private ones given we seldom know the deal terms or postdeal performance.

 

 

Well, Torstar is public and it used to be a big position.  ::)  Seriously, I don't have the historical cost handy, but the position was acquired in several tranches of ~$10m each, and appear to own about 41% of the non-voting shares.  It looks like the investment thesis was ill-conceived and I have doubts about whether FFH will ever be able to repatriate that capital.  In the context of today's capital level, it's small-change.  But, tack on some sort of reasonable return and a "good" investment of that magnitude *should*  have been worth several hundred million.

 

Error of commission, but they weren't the only people who mis-estimated the future of newspapers (and Harlequin books!).

 

 

SJ

[FairFacts]

Don’t forget Kennedy Wilson Holdings....

[petec]

 

 

Well, Torstar is public and it used to be a big position.  ::)  Seriously, I don't have the historical cost handy, but the position was acquired in several tranches of ~$10m each, and appear to own about 41% of the non-voting shares.  It looks like the investment thesis was ill-conceived and I have doubts about whether FFH will ever be able to repatriate that capital.  In the context of today's capital level, it's small-change.  But, tack on some sort of reasonable return and a "good" investment of that magnitude *should*  have been worth several hundred million.

 

Error of commission, but they weren't the only people who mis-estimated the future of newspapers (and Harlequin books!).

 

 

SJ

 

Agreed! I just didn’t want to end up looking at every investment they’d ever made so I limited myself to current needle-movers!

[petec]

Don’t forget Kennedy Wilson Holdings....

 

Good point. I haven't read much on it for a while. Will do so and revert.

 

I've also reordered the stocks to reflect current size. In total this lot adds up to about $5.4bn (I may have some of the share counts wrong given how they are spread across subsidiaries).

[wachtwoord]

Thanks for sharing!

[wondering]

I would like to know more about the Digit investment.  I realize that they are probably years from profitability, but I would like to know how revenues are growing.

 

I guess I will have my chance to ask at the AGM.

[petec]

I would like to know more about the Digit investment.  I realize that they are probably years from profitability, but I would like to know how revenues are growing.

 

I guess I will have my chance to ask at the AGM.

 

Please feed back if you get an answer.

 

The CEO there has a very impressive background. As I have said elsewhere FFH does seem to be able to attract real talent to its projects.

[petec]

Don’t forget Kennedy Wilson Holdings....

 

Good point. I haven't read much on it for a while. Will do so and revert.

 

I've also reordered the stocks to reflect current size. In total this lot adds up to about $5.4bn (I may have some of the share counts wrong given how they are spread across subsidiaries).

 

Edited for KW and with an additional observation at the bottom.

[Dazel]

https://ca.finance.yahoo.com/news/seaspan-announces-closing-second-500-000000115.html

 

This has been very profitable so far and has increased the investment portfolio’s yield on a billion dollars. I would imagine “any” sort of trade deal would be material to Seaspan and this investment.

[petec]

https://ca.finance.yahoo.com/news/seaspan-announces-closing-second-500-000000115.html

 

This has been very profitable so far and has increased the investment portfolio’s yield on a billion dollars. I would imagine “any” sort of trade deal would be material to Seaspan and this investment.

 

Trade deal?

 

Yes, the options were at phenomenal prices.

[petec]

Fairfax’s two biggest positions - Eurobank (proforma for the merger) and BlackBerry (assuming conversion) are on a tear this year. Eurobank produced good results with an excellent outlook; BlackBerry produced excellent results today.

[investmd]

Fairfax’s two biggest positions - Eurobank (proforma for the merger) and BlackBerry (assuming conversion) are on a tear this year. Eurobank produced good results with an excellent outlook; BlackBerry produced excellent results today.

 

Petec,

Thank you very much for sharing this analysis. Over past 5 years, insurance business operating results appear solid  but there has been essentially little change in market value of FFH. Going forward, hopefully Eurobank, Seaspan and Blackberry can drive equity investments results upwards and reflect in a substantial increase in market value. My expected outcome for investing is that FFH market value should increase AT LEAST 50% over MOST 5 year periods without including dividend payouts.

 

Doesn't seem like hope for significant stock buybacks will come to fruition. However, with good combo of insurance business and equity results, FFH should be in a position to deliver.

[obtuse_investor]

Just to normalize, 50% over a 5 year period is 8.44% annualized return.

 

I don't think anyone who owns FFH is expecting annual returns less than 10%. Maybe that is because of the 15% anchoring management has been doing.

 

 

[shalab]

People holding FRFHF have been very happy so far - it has essentially been flat for the past five years with a dividend yield of 2%/annum. As Biglari has shown, it is not the returns that matter, it is the ability to sell a story that does.

 

Just to normalize, 50% over a 5 year period is 8.44% annualized return.

 

I don't think anyone who owns FFH is expecting annual returns less than 10%. Maybe that is because of the 15% anchoring management has been doing.

[petec]

By my maths the top 4 positions are now:

 

$1bn Eurobank/Grivalia, which could have a long way yet to run.

$930m Blackberry (including the convertible at par) which seems to be gaining operating momentum.

$820m Seaspan (not including $500m of debt, but including the profit on the exercise of the third tranche of options, which are in the money).

$700m ICICI Lombard which has had a terrific run and which I suspect they might sell.

[petec]

Brief update on Resolute, which has slowly been sorting out its balance sheet:

 

FY18 ebitda: $570m.

FY18 FCF: $280m.

YE18 net debt: $340m.

Market cap: $700m.

FY19/20 consensus ebitda: $400m (ev/ebitda: 2.5x).

FY19/20 consensus FCF: $170m (FCF yield: 24%).

 

The glitch is that the pension liability is $1.25bn - if you include that the forecasted ev/ebitda is 5.5x.

 

Horrible industry and consensus is clearly forecasting that 2018's operating performance can't be sustained, but it feels like last year's $136m special dividend might not be a one-off. Fairfax owns an eyewatering 33.5%, worth $240m, and their share of the special was $45m.

[petec]

Eurobank (including Grivalia) is off to the races. $1.2bn position now and still very cheap.

[petec]

Quess just issued 9% of itself to Amazon at 676/share. The stock has been very weak this year and looks very cheap. It closed up 9% on the day at 480.

 

Also a pro-market won Greece’s general election last week, scoring an absolute majority in Parliament over the incumbent left-wing government.

[wondering]

petec, thanks for the continued updates on the FFH investments.  Sometimes, the investments that are outside of North American are harder to follow unless I make a conscious effect.

[petec]

Is anyone following Thomas Cook? I can't find a recent thread on it but it has halved over the last couple of months and was down 20% yesterday. Seems odd, even with the weakness in Quess.

[wisdom]

https://www.thomascook.in/press-release/statement-from-mr.-madhavan-menon-chairman-managing-director-of-thomas-cook-india-ltd./109

This may be a reason. Thomas cook plc going into bankruptcy.

 

Another Indian company king & Cox is also struggling in the travel industry.

[cwericb]

At least somebody still likes FFH...

 

https://seekingalpha.com/article/4287873-fairfax-market-yet-recognize-potential?dr=1